THE TARIFF.

Lyttelton Times, Volume CXVII, Issue 17287, 30 September 1916, Page 13

THE TARIFF.

CONTROVERSY BETWEEN CORRESPONDENTS. A REVIEW, '■ By DR J. HICHT, professor of .History and Economics, Canterbury' University College. The editor has sent me twenty-five columns of newspaper controversy on “Scientific Tariffs,” with the requ&fc for a. short review thereof. As the discussion is to be resumed, I propose to make only brief references to certain weaknesses in the arguments so far advanced and suggestions as to the most profitable lines tor subsequent debate. I should like to say that tho opinions expressed herein aro shared by Mr J. It. Ccudliffe, my assistant, who has had practical experience of the lccal tariff on its administrative and statistical sides. By opening his columns to a debate on a subject which must shortly become of great practical importance both in local and Imperial politics, the editor is performing a valuable public service, since the discussion should help to educate tho ‘‘man. in the street,” with whom in the last resort the choice of fiscal principles must lie, and whoso attitudo will determino whether tho particular tariff adopted shall bo administered well or ills. There is, however, a danger in popular arguments on economic subjects, that partial and incomplete reasoning may havo a mpcrficial advantage—indeed there is no department of knowledge where fallacies are so many and so hard to scotch. This is partly because) of tho extreme complexity of economic phenomena and partly because tliero is no oue who does net feci competent to deal with them. It is inevitable that somo men rush into a public discussion without fully realising rlie difficulties that surround tho subject in question. I do not suggest that most men cannot supply something useful bo long as they confine themselves to facts within their own experience or to belief founded on adequate knowledge and arc alive to the dangers or generalisation from partial and incomplete data and of biased

judgments. COMPLEXITY OF THE ISSUE. The application of scientific methods to economic phenomena is always difficult, and the question of protection or freotrade cannot be solved off-hand. The immediate and superficial effects of any change in economic structure aro followed by countless reactions and adjustments, and it is often the case that the underground, long-period effects are by far the most important. A good illustration of useless argument is found in tljo fruitless discussion of the benefit received by New South Wales from freetrade or by Victoria from protection. The tariff of Customs duties, is. only one of a great many factors controlling national prosperity ; its effects aro intermingled with anil modified by tho results of other causal factors operating at the same time. In tho case in question, rainfall and other elements of climate and the influence of the gold-diggings, to mention only two factors, are sufficient to obscure hopelessly the effect of the particular fiscal system. This, however, does not affect the validity of the, assertion that secondary industries lid grow up under freetrade; but it is a vain task to attempt to judge from more observation, first, whether they grow faster under freetrade or under protection, or, secondly, which system helps to bring about a just ratio of primary to secondary industry. It is impossible to gather from statistics alone, however complete and accurate they may bo. the degree to which a country’s welfare is affected by a single 'actor selected from a number, many of which’ are stronger and operate in diverse ways. No satisfactory .conclusion "tin be reached without the aid of the logical method of deductive reasoning. Tho assertion that protection is a trong efficient cause of the prosperity of the United States, or that freetrade s responsible for the excessive poverty >f certain classes in Great Britain, needs, to be supported by logical argument before it is conclusive. Up till 'ho present the protectionist writers who have argued in this strain have 'tot given any valid reasons for causally onnecting prosperity with protection tod ]x>verty with freetrade. Merely to •ssume that because the two phenomena occur together, therefore they are con■(teted causnllv, is to. omit the essential Top in the argument. This is a, point which ought to be remembered in sul> i sequent discussion.

In some of the arguments there lav the implication that the adoption of high protection by other countries is a. good and 'sufficient reason for its introduction here. But institutions are relative to time and place, and tho real and fundamental reasons for the more rpneral adoption of protection rather j than freetradc have been overlookal. The existence of an institution s no sufficient proof that it is right beneficial, When the people as a body have learnt to know their own ‘ntereats. individual, national and universal, and to reconcile them in tho , political system tho millennium will have arrived. In the meantime the most enlightened democracies commit mistakes in the name cf admirable and , altruistic ideals. Here is an opportunity for the opposing sides to show convincingly what are the real reasons that have established the principlo ol protection in so many countries of the world. Finally, the warning is necessary that our judgments aro apt to be subjective and coloured by our own ex- , perieneo and environment. As in most economic controversies, there is a dash of interests, and it needs a. strenuous effort for intellectual honesty if each of ns is to rise above personal or group interests and prejudices and view the subject in 'relation to the broad consideration of national welfare. A SCIENTIFIC TARIFF. Tho controversy originated in clause 6 of tho constitution of tho New Zealand Board of Industries. This clause obviously implies, and the interpretation is confirmed by official speeches, the. advocacy of higher protection. In the words of tho constitution, one ot>-' jeet of the hoard is “to use tho influence of the organisation in securing a Customs tariff based upon scientific principles sufficient to protect the national standard of living against tho importation of goods which aro the product of tho people who have to work on a much lower standard of wages and under less favourable conditions.’’ The wording of the clause leaves ono in soiuo doubt as to whether the scientific principles aro to bo sufficient to protect the standard; but the meaning evidently is that there is to be a “scientific” tariff to protect the standard of life. At the outßet, the freetraders might well have invited the protectionists to’ define exactly tho principles to bo applied, and the rules to be followed in framing a “scientific” tariff, or to cite axwrplea of mk-i tariff in baiwr-- 1

Tho phrase sounds well enough; but anyouo familiar with the history and literature of scientific tariffs feels the need of rather more precise definition before passing judgment. Then again, it is pertinent to ask, in view of the procedure actually followed in tariffmaking iu any State, democratic or autocratic, what probability is there that the tariff may finally represent a set of principles ascertained from scientific examination of all the relevant facts, may nob be extended in directions where it will do more harm than good, and may bo removed at the end of the period within which it may reasonably, bo expected to produce its full effect. THE “CHEAP LABOUR” ARGUMENT. The main function of the proposed tariff is to/ ho “ the protection of the national standard of living against the importation of goods which aro the product of the people who have to work ou a much lower standard of wages and under less favourable conditions.” The debate on this point, was very confused and tho arguments really touched several different issues. Perhaps, taking our stand on national interests and disregarding any other viewpoint, we may put out. of court rho question of toe morality of making conditions worse ‘ for tho labourers of other countries by shutting out the goods whoso manufacture is their livelihood. Even then there is much vagueness and a lack of clear definition. Vvhat ‘cheap labour” is aimed at? Further discussion would bo greatly facilitated n tlie protectionists would state clearly whether they wish to restrict German goods, or Japanese goods, or whether they would restrict goods from all lands where the conditions of labour are not as good as in New Zealand-; —countries such as tho United Kingdom, for instance. If the tariff is to operate against all cheap labour, tho protection gained would bo greater; but the racial erv ought to be dropped. Similarly, we’ ought to havo a clear distinotion between tho economic argument and the purely political argument against “enemy” goods. The definition of “cheap laoour has received somo attention, and in passing it might just he noted that the following elements arc involved: —(a) The money cost of the labour; (b) the purchasing power of money; (c) tho productiveness of labour; (a) the hours and conditions of labour and tho effectiveness of tho aids to labour, such as machinevv and business management. A vital point overlooked hitherto in tho discussion is, whether, with our small population and limited markets, production in some of the secondary industries sought to be crtablished by protection can ever in the near futuro bo anywhere near as low in cost as in other crunfries whose huso populations and markets enable them to use tho most expensive machinery effectively and stimulate invention and the constant improvement of business manage-

ment. I may ho allowed to refer here to, the necessity in a controversy of this sort of looking carefully to the meaning of the terms used. For example, comparisons of prices arc valueless unless the goods whose cost, and prices aro compared arc identical and servo similar needs. An import and a homeproduced community may be called by tho same name, but economically be quite different things, just as, to refer to a case raised by a correspondent, a house built of Baltic timber is nok the same thing as a house of rimu. To extend this little digression on method-several times effort was misspent and argument confused through inadequate attention to the meaning, clearly enough expressed, of an opponent’s statement. I select an example from tho last batch of letters--one of the free-trado. champions, bavins assorted that “it would bo practically impossible for English, German and American firms to form a trust to exploit- New Zealand,” thus clearly referring to tho impossibility of the formation of an international trust, Ins opponent misfit-ports him by substituting “or” for “ ano,” and proceeds 1o assail a position that was not taken up. It is, the latter writer who persists in the mistaken notion that tlm individual States ,of the American Union have the general’right to institute protective duties against one another Tc revert to tho subject of this section. it has yet to be proved that a tariff will protect the national standard. 1 commend this point to the protectionists, upon whom the onus of proof must lie. since they advocate the change. It is not sufficient to assume the benefit, which should bo distinctly stated and analysed in detail. On the other hand, the freetraders have not yet elaborated tho cost of protection and tho incidence ok protective duties generally. Tho protectionist must show —(a) That the national standard of living is in danger .through tho competition of goods produced by cheap labour; (b) that the adoption of a high tariff wc'.ild remove the. danger; n;;cl (c) that the cost of the tariff is not 'disproportionate to tbe benefit. Further, it ought to be stated clearly whether sole reliance is to ho placed on the tariff or whether other means, more or less effective than the tariff, are to bo adopted. “ INFANT INDUSTRIES.” One of the strongest arguments for protection received xsfvy little notice in the ; but one object oi ilie Board of Industries is the estab-

lishment of' new industries, and stress has been laid upon the necessity for protection to these industries while they are inf process of development. This is a rejoinder to the fveetrado argument of the benefit cf the lower cost of articles and the increased utility derived from specialisation in international trade. While many protectionists admit that protection may diminish tho national dividend, they maintain that Uiic result is only temporary and that in course of tine too national wealth is increased by the development of new industries and the stimulation of old. The balance of advantage must bo proved. Is the tariff essential tor the building up of healthy industries, or does it result in unhealthy forcing of certain industries at the expense oi tho community? To bo logical, protection for infant industries should be temporary and should be removed when the industry has grown sufficiently strong to compote on equal terms with competition from overseas. Reference to experience will show the vary serious practical difficulties that arise here. Moreover, who is to select the industries which aro-to bo protected, or arc we to have all-round protection in tno hope of developing some new business? Tho point has already been raised as to tho possibility of secondary industries growing up without protection. If it be assumed that protection ought to be granted to certain young industries, there is tho further question as to whether a tariff is the best means bv which to give assistance. A good deal may bo said, upon the relative merits of bounties and import duties as regards both effectiveness and cost to the community. Tho main points to bo considered hero then are:—(a) Whether secondary industries grow up without protection; (b) whether it is desirable to hasten tlieir development; dc) the distinctive marks of an industry suitable for protection and the means of calculating tho araoupt of protection necessary to establish it securely; (d) whether' tho cost involved in a proteotiTo tariff will bo repaid and, if so, when; and <ej whether more effective mean* are available. These questions are purely economic; but even in this sphere it is necessary, in balancing cost and benefit, to take account of the probable effect of protection not only upon the total amount of the annual national dividend, bun also upon its distribution among the people and upon its steadiness or vari- . jhijity, both of which are im«o

elements in economic welfare. Furthermore, “ man doth not live by bread only,” and the ultimate test is the effect, direct and indirect, on general welfare, which is influenced to some extent by political and general social factors of a. non-economie kind, though as a general rule .social welfare is dependent upon and varies with economic welfare. THE TARIFF AND TRUSTS. A speaker at the recent public meeting of tho Board of Industries said that protection ought not to go beyond a certain point lest trusts bo created within the country. The connection between tariff and trusts lias been carelull y investigated by many economists of late, particularly in regard to_ Germany, Austria, ’Russia and the United States. AVhilo the famous dictum oi the head of tho Sugar Trust of America, “the tariff is the mother of Lusts,” is now recognised as stating only a partial truth, it- is established beyond doubt that protective tariffs cciistituto a. favourable condition for the formation and operation of trusts: they tempt the formation of combinations and they make it easier for them when formed to raise prices and reap abnormal profits for some considerable time by exploiting the homo market urrestrained by the risk of foreign competition. But. a more subtle, though perhaps more important, aspect of the question seems to have escaped the notice, of tho “ Lyttelton Times” correspondents, and that is the question of overcapitalisation. It is generally held now that the protection of any industry or group of industries tends to attract thither a flow of capital in the total amount, out of proportion to the prospect of profitable investment. The result is over-capitalisation and a period of cut-throat competition ruinous to in any engaged in the industry. This is followed by tho formation of a combino to control output and sales, and the. tntst or kartell is grossly overcapitalised with consequent waste of national resources. IVc should havo some safeguard against such a process in New Zealand beyond an assurance of moderate protection; for it must not be forgotten that New Zealand, because of its small population ind its great distance from tho main markets of the world necessitating high freight charges —a species of natural protection—offers an easy field to combines fa. or avowed. a EMPLOYMENT FOR RETURNED SOLDIERS. The problem of absorbing onco more the fifty or sixty thousand men who have gone from Now Zealand to fight in France is. quito rightly attracting public attention: but rather more demonstration is needed before this problem can be advanced as a. valid argument for alteration of the fiscal system. It is open to the protectionists in this controversy to show in tho subsequent discussion that extraordinary measures are necessary to cope with tho difficulty: that new industries mnr.t bo created to absorb not only the re turned soldiers, but i:ho tho influx of immigrants that may reasonably be expected; aVid that a. tariff will increase employment as a whole and not only in certain industries at the expense of.others. On the other hand, the freetraders might ask whether the returned soldiers are really an addition to the population and might attempt. L show whether re-absorption is possibl without increased protection. T should like to point out, however, that ihi l; question is. from the point of view of the present controversy, very largely irrelevant. Even if it ho admitted that more employment will be needed, that does not in itself afford a valin argument, for change. The essential question is, will protection increase the welfare of the country? Tbe introduction of tho returned soldier problem, as an argument, is merely playing on current sentimentMILL PRICES FALL? Almost all tho argument so far has been based on current conditions, and I should like to invito the debaters to consider tho position in Now Zealand if the war should bo succeeded by a long period of falling prices. The last' twenty years havo seen a continuous rise in prices, especially tlioso of the primary products which Now Zealand produces so abundantly; but this has not always been so. For the twenty years preceding ISOti pricqs fell almost' as continuously. It is rather difficult, to prophesy what will happen after the war; but one or two probabilities seem reasonably certain Tho first is that capital will bo relatively scarco and dear, and that a high rate of interest will result, and in the light of the history of past wars it is at least possible that a boom of three to five years’ duration will be succeeded by a long ■ period l of falling prices. The position is. of course, also complicated by currency conditions Whether prices rise or fall, however, tho demand for tho j primary products of Now Zealand will remain keen, and their prices should be above the general level. Suck a change as this would be fraught with great consequences in its effect on industrial expansion, closer settlement and labour problems. Tho debaters may reasonably be invited to consider this possibility. SUMMARY.

In concluding this hasty review, 1 should like to remind readers than tho choice offered to us is not between freetrade and protection, but between protection and higher protection. The Customs tariff of New Zealand has already rather more than moderate protection. Duties range from 5 per cent to 40 per cent, and the most usual rates of ad volorcm duty aro 20 per cent and 25 per cent, often plus a preferential tariff against foreign goods. One, at least, of the industries, for which more protection is asked has been protected for over twenty years, and at the present time is sheltered behind a tariff duty of approximately 1)0 per cent on landed values. Tho high degree of natural protection in the shape of freight charges enjoyed by New Zealand producers, especially of goods whose value is; low relatively to their bulk, has already been nhmtionod. Both sides might do well to devote a little attention to the state of the present New Zealand tariff, which affords an. excellent illustration of the extent to which a tariff may depart front scientific principles. Tile schedule comprises hundreds of items free and dutiable, grouped under an arbitrary system which, l>y the way, is different from that on which the'statistics are compiled. 'The actual rates charged show very dear evidences of political compromise, and the decisions published monthly are calculated to exasperate and bewilder any importer who attempts to follow their minute and often trivial niceties. A tariff that is under the necessity of defining minutely according to the composition of a heel, vhe difference between a shoe and a slipper, or that insists on separate assessment of various parts cf machines which come under different, tariff heading, is surely in need of a little business eommonsense. One decision laid down the distinction between two classes of textiles (with tho corresponding difference of being dutv- free or paying 20 per cent duty) lying in the question whether the spots on the cloth were woven with the original weaving or added by a second operation. If the Board of Industries can manage in any way to direct attention to absurdities of the present tariff, it will have rendered a public service. This leads to a further question. Most of these duties are levied not for revenue—’indeed, the revenue derived in mauy cases would not pay the cost of collection—but for direct protection of some New Zealand manufacture, or as restriction on some substitute or even as compensatory duties by way of sop to some trades. The imposition of initios for revenue gUfe would lead, to

a vorv great simplification of the tariff Another point that might 'no diseusse; is the question of au valorem dut-iea against specific duties, and tho armtrary definition of “ fair market value.’ The'cost to the Country and the inconvenience tc* tho merchants involved tho suspicious scrutiny to which all invoices must be subjected are perheptoo familiar to give, rise to any com olaint. As a last word, I feci bound to m; that, in iay opinion, the honours ir this particular controversy have- so ' been carried off by the free-trade side. Tile protectionist side, while perbap-: appealing strongly to popular. opinion and prejudices has so far iailed tc prove the essential step in their argument. No doubt it is desirable to pro teet the national standard of living, aa. a to have secondary industries, anil to employ tho returned soldiers; but 1 imagine that, critical readers of liman letters are still waiting for the prom that higher protection is necessary or oven desirable -to attain these, curb; and. since we already have protection, ami it, U- the protectionists who aro agitating for change, the onus ol proa, is noon them